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Weekly Review: Economic Tailwinds for 2012

Pundits, including yours truly, have been producing some pretty dour forecasts for 2012. Even the Federal Reserve FOMC 13 December 2011 meeting minutes (released this week) had a left handed outlook (first article below author's photo):

[FOMC] Members continued to expect a moderate pace of economic growth over coming quarters, with the unemployment rate declining only gradually toward levels consistent with the Committee's dual mandate. Strains in global financial markets continued to pose significant downside risks to economic activity.

Yet, we tend to ignore the economic tailwinds because the uncertainty caused by Europe appears to be so large (and unpredictable). 2012 is an election year - and the USA economy historically does better in election years.

Looking at the economy since 1987, real GDP growth has averaged 2.58% per year. Excluding the 2008 election year, economic growth in election years is above to well above the averages. Consider that a 1% higher GDP growth equates to an additional $150 billion being spent by the private sector in 2012.

2008 was a special situation - a year where the perfect storm of demographics, defective financial instruments, and an artificial economy conspired. Yet, I could argue that 2008 would have been much worse had it not been an election year. Even if 2007 thru 2010 is removed from the averages, election years still have above average economic growth.

The eye opener should be consumer spending in election years. Is there something about elections that excite consumers?

Is it that citizens finally feel some control or power in voting for or against their representative? Does this feeling of power loosen their purse strings?

Does elections raise consumer expectation for a better future?

In many countries, the governments begin to spend more money in election years to make their citizens feel good about their representatives. But, as evidenced from the graph below - the USA's government spending does not have election year spikes.

Whatever the case, there is no doubt the private sector historically picks up in election years. Of course that trend can be overwhelmed by a financial crisis, as was the case in 2008.

ECRI has called a recession. Their data looks ahead 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown. Although Econintersect data is not recessionary (one month look-ahead) - we take this recession call seriously. This week the actual level of ECRI's WLI index decayed from -7.6 to -8.2. The index was in a range between -7.4 and -7.8 for the previous seven weeks. This index is indicating the economy six months from today will be weaker.

Initial unemployment claims contracted 15,000 (from 387,000 which was revised up from a preliminary 381,000 last week) to 372,000. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – fell slightly to 373,250. Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.

Overall the data this week continued to show a weakly improving economy. Is it the calm before the storm? The growth being seen this week appears solid.

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